NorthStream Capital Inc. issues a Notice of an Event of Default under the Trust Indenture for the Sherritt International Corporation’s (TSX: S) 10.75% Unsecured Notes due 2029

TORONTO, Feb. 11, 2025 /CNW/ - NorthStream Capital is a holder of Sherritt bonds and has concerns about the breach of a covenant in section 4.08(3) of the Sherritt 2029 Bond Indenture governing the limits of certain "Restricted Payments".

The relevant facts are:

In 2023 Sherritt made payments of $24.5 million in respect of restricted share units ("RSUs") and performance share units ("PSUs").

Payment in kind (PIK) interest has been accrued and not paid in cash on the Notes during the immediately preceding 12 months prior to those RSU & PSU payments.  

Restricted Payments over $2 million cannot be made if, within the prior 12 months, Sherritt has satisfied any Note interest obligations by way of PIK Interest.  This provision is clearly intended to limit dissipation of liquidity in circumstances where interest on the Notes is not being serviced in cash.  If the holders of the 2029 Notes are not receiving cash payments, then these other payments should also not be made.

NorthStream communicated this issue to the company in February of 2024 summarizing why a covenant breach had occurred. We received a reply stating that the company complied with the indenture however no explanation was offered.

NorthStream requested that the company provide a written response explaining why there was no covenant breach but has yet to receive an explanation.

NorthStream notified the Trustee (TSX Trust Company) of the covenant breach in February of 2024 and received a written response one day after the annual general meeting on May 9^th, 2024 stating that the Trustee is not deemed to have notice of a Default or Event of Default unless holders of 25% of either bond maturity request the trustee to act as per section 7.02(i) of the 2029 indenture.

NorthStream asks holders of either bond maturity to contact us so that 25% or more of Sherritt bondholders support the Trustee taking action and bringing this covenant breach to resolution. 

We would also like to highlight some concerning governance practises that have severely impacted bondholders.

The periods where the company generated excess cash flow and is required to sweep the 2026 Notes at par in an amount equal to 50% of excess cash flow did not occur due to the company not meeting the minimum liquidity test of $75 million. The company reported it generated $111.5 million of excess cash flow over the 18-month period ending June 30, 2023. There has been ample evidence that the protective covenants in the two bond indentures are being gamed to avoid excess cash flow sweeps to retire the 2026 Notes at par and avoid paying cash interest on the 2029 Notes.

The minimum liquidity test was ignored when the board permitted borrowing on its credit facility to make payment for the 2022 Dutch auction and for the RSU's and PSU's in 2023.  These decisions materially impacted the company's available liquidity and created unnecessary financial risk.

The decision to make PIK payments on the 2029 Notes for the two interest payments prior to the $24.5 million cash payment for executive incentives is concerning due to it being a covenant breach, but also a signal that there is not alignment between management incentives and the treatment of debt and equity holders.

We ask the board to recommend deferring the RSU's and PSU's payable in March 2025 until the covenant breach is resolved. The current amount of RSU's, PSU's and Director Share Units issued to executives and directors represents over 11% of the shares and creates a significant financial risk to the company.

NorthStream welcomes feedback from other holders of the 2026 and 2029 Notes that have been unfairly impacted by the unauthorized restricted payments in 2023 through 2025.

[Advisors]

NorthStream has engaged Norton Rose Fulbright Canada LLP as legal counsel in connection with this matter.

About NorthStream:

Founded in 2016, NorthStream Capital Inc. is an independent alternative investment management firm specializing in event-driven opportunities in the Canadian and US credit markets.

SOURCE NorthStream Capital Inc.

Jeffrey Gavarkovs, Managing Partner, Portfolio Manager, NorthStream Capital Inc., 416-613-4652, [email protected]